Greg Mankiw hot off the presses

Jim Capretta looks
at the Baucus healthcare bill and concludes that, because the subsidies
phase out as income rises, it imposes an effective marginal tax rate on
income of about 30 percent for many families. Add that figure to the
income tax, the payroll tax, and the phase-out of the EITC and "the
effective, implicit tax rate for workers between 100 and 200 percent of
the federal poverty line would quickly approach 70 percent – not even
counting food stamps and housing vouchers."

Um… wow, I’m stunned.
Makes sense now that the bill doesn’t phase in until late if it phased in immediately, the democrats will lose every election from now till… decades to come.

mulpOctober 7, 2009 at 7:18 pm

So, that argues for single payer funded from general revenues, …

Or free euthanasia funded by government with the repeal of all laws that hint that government will save people from dying by mandating lifesaving sick care.

LordOctober 7, 2009 at 8:38 pm

This is what you want if you want people “to pay their share”, that is, to oppose increasing income taxes on the affluent. You make them pay taxes on income that under any credible accounting does not really exist and then refund those taxes under various subsidizes to persuade them taxes are not really in their best interests. Mankiw should be delighted.

John ThackerOctober 7, 2009 at 9:24 pm

In 2010, the deduction for property taxes for non-itemizers expires. Also in 2011, the child tax credit drops from $1000 per child to $500 per child. Also in 2011, higher EITC for families with 3+ children are repealed. And so on.

It is of course possible that all the deductions and credits that are worth more to the middle class and working poor will be extended, but it hasn’t happened yet.

I suppose that under some interpretations President Obama has promised to extend them.

TravisOctober 8, 2009 at 1:06 am

Um everything henge said plus the fact that this would only be so for those on the exchange or without insurance already… which would make it a lot more like an increased premium expense for higher income groups… I know there’s opp. cost but this is a ridiculous lie.

EuclidOctober 8, 2009 at 8:39 am

Mankiw implicitly assumes that you can add the income tax, payroll tax and phase-out of the EITC. Research shows that each marginal tax does not necessarily elicit the same behavioral response and in some cases does not elicit much of a behavioral response at all. For example, see the research on the intensive labor supply elasticity for the EITC program. See also the research on the marginal income tax. Most estimates for men are close to 0. This evidence should be combined with evidence on the effective tax rate.

John ThackerOctober 8, 2009 at 9:24 am

I’m confused at the commenters who deny the entire existence of an implicit marginal tax rate, and who savage the very idea as a vicious lie.

It is a fact that if you give people tax credits and subsidies that phase out at a certain income range, then you put people into a situation where an extra $1 of income means not only paying taxes on that amount, but also losing substantial benefits. It’s a given

People commenting accept the idea that it can be “not worth it” for single mothers to work if the amount that they have to pay for child care wipes out their take home pay, right? I assume so, since they seem to approve of the idea of child care credits. So how can it be completely ridiculous to note that when an extra $1 of income means losing over 50 cents of subsidies, tax credits, and benefits that people may feel that it’s not worth it to overwork themselves to get that raise, or to take that harder job?

The point argues just as much for lengthening out the phase-out range of the subsidies.

That’s why conservatives and libertarians, just as liberals, support the EITC and why it has been expanded in every major tax bill with bipartisan support. (Whether a tax cut bill, a tax raise, or a tax reform eliminating deductions.) The EITC in one sense means more welfare payments, but it’s designed to encourage people to join the working people instead of remaining unemployed and just receive welfare.

Lord’s comments are as charitable as implying that liberals want unskilled labor to stay on welfare rather than work, the better to not provide competition for skilled union labor.

FlaneurOctober 8, 2009 at 9:57 am

Help me understand this: a new direct subsidy to acquire health insurance is slowly phased out as a recepient’s family income exceeds a multiple of the poverty level. In all likelihood this occurs because a family member has acquired a job which provides access to untaxed health care benefits. By what logic does the phased withdrawal of a direct subsidy constitute a tax? If I withdrawal my son’s allowance because he gets a job raking leaves, is that a tax?

That’s because “doing x” is logically not the same as “not doing the opposite of x.” For example, consider unemployment benefits, which have been extended. Clearly, “not further extending unemployment benefits” is not equivalent to “cutting unemployment benefits.”

Consider a hypothetical in which Congress just packed up, went home, and did nothing. Could you then say that they were “cutting unemployment benefits” when the extension expired (since Congress did nothing to further renew it)? Of course not. It would be ridiculous to charge Congress with cutting benefits when all they were doing is NOT extending them. And the same exact argument applies to the tax issue.

This is what you want if you want people “to pay their share”, that is, to oppose increasing income taxes on the affluent

You missed the point. These are not explicit taxes. They come from phasing out the subsidy as people get wealthier. If you get $4,000 of subsidies when you make $10,000 and no subsidies when you make $18,000 then you are playing an implicit tax of 50% on that extra $8,000. We already have a huge problem with extraordinarily high marginal taxes on the poor as benefits are phased out. Pull out The Concise Guide to Economics entry on welfare and you see that a single mother who makes $12,000 makes $27,007 from TANF, food stamps, and section 8 housing. If she made $24,000 then the subsidies would drop radically and her total benefit would be $27,505. Her salary went up $12,000 but he total compensation only went up $500. That’s basically a 99% tax rate. Now add in this misguided health care plan and you have an anti-poor fiasco.

Alex October 8, 2009 at 3:14 pm

@libert I think your point is well taken, and because of my own predispoitions I am inclined to agree that the allowing to expire and reducing are not one and the same.

Still, if:

Extending (E) leaves benefits even
Not extending (~E) reduces them by a determined degree (as the legislation would specify the extent of the change),and Cutting (C) means Congress reduces benefits by a variable degree

then it is easy to see where the confusion comes from. ~E could easily be classified as a subset of C. The different intent behind ~E and C does nothing to preclude any group from noting that the consequences are different gradations of the same action. To say that C is the logical opposite of E is certainly improper as the former entails a range of options unavailable from ~E, but you can understand why someone would capitalize on the ambiguity.

My question is whether or not defining the reduction of benefits as a tax is reasonable. In routine conversation, a tax is typically understood as an imposition on something earned individually. Hence the outrage from libertarians (arguments tht can be understood if not necessarily agreed with in their entirety). Referring to the disincentive introduced by expiring subsidies as a tax is purposefully misleading, especially since the academics who typically merge the two very distinct forms of extraction do little to explain the difference.

Can the expiration of a benefit provided but not directly earned be reasonably called a tax? Or is use of the language exploitative? I suppose it depends on whether you consider welfare benefits a right or a privilege, but its intriguing that those who invoke the term tax to describe this situations are those least like to think of the benefits expiring as rights…

Tony CohenOctober 8, 2009 at 6:51 pm

You may be interested to know that in many of the more ‘liberal’ sites I visit, this facet has always made the bill a joke, among other reasons.

More of a joke than when he sat there forever trying to craft bi-partisan support and still stood alone on the capital…tough call.

I love the new idea of an opt-out. Right our of ‘Nudge’, and politically perfect.

Note: politically perfect for me means that Republicans actually are forced to put their money where their mouth is.

LordOctober 8, 2009 at 9:02 pm

Justin, you miss the point. Anyone that needs a subsidy shouldn’t be paying any tax because what is being subsidized are costs. Taxes should only fall on income, revenue less costs. The problem becomes only a minority of voters have true incomes but all voters vote on taxes, so if you only tax those with true incomes, most voters would not object to raising taxes on them. High effective marginal tax rates occur due to imputing income that doesn’t exist and then needs to be replaced by subsidies, all to persuade them to oppose taxes.

libertOctober 8, 2009 at 11:50 pm

Maxwell: By your own argument, you are also falling into the effects of framing, right? My point is simply that our baseline should be current law that has been agreed to. No elected official agreed to cut taxes forever. The Bush tax cuts were temporary (although mostly because they were pushed through by reconciliation to prevent a filibuster), just as an extension of unemployment benefits is.

Regardless, any argument on this topic, yours or mine, is semantics, as you say.

On substance, Mankiw has a point about implicit marginal tax rates (assuming his math is right), but that of course does not accurately reflect the extent to which citizens are taxed or distortions to the economy. For example, the EITC increases marginal tax rates despite the fact that it reduces the tax burden. Further, tax credits that phase out with income (hence increasing implicit marginal tax rates) have ambiguous impacts on labor supply: they both increase AND decrease labor supply on the intensive margin while increasing supply on the extensive margin. The result is theoretically ambiguous but most empirical studies find net positive effects on labor supply. In that case, a tax credit like EITC that increases implicit marginal tax rates actually decreases the size of government while increasing labor supply and helping the most needy.

Thus, while marginal tax rates may go up, the size of government, income inequality, and labor market distortions will fall. All effects that Mankiw would applaud, I imagine, despite higher marginal tax rates. While not a lie, marginal tax rates are clearly not the whole story.

libertOctober 9, 2009 at 8:26 am

Maxwell: By your own argument, you are also falling into the effects of framing, right? My point is simply that our baseline should be current law that has been agreed to. No elected official agreed to cut taxes forever. The Bush tax cuts were temporary (although mostly because they were pushed through by reconciliation to prevent a filibuster), just as an extension of unemployment benefits is.

Regardless, any argument on this topic, yours or mine, is semantics, as you say.

On substance, Mankiw has a point about implicit marginal tax rates (assuming his math is right), but that of course does not accurately reflect the extent to which citizens are taxed or distortions to the economy. For example, the EITC increases marginal tax rates despite the fact that it reduces the tax burden. Further, tax credits that phase out with income (hence increasing implicit marginal tax rates) have ambiguous impacts on labor supply: they both increase AND decrease labor supply on the intensive margin while increasing supply on the extensive margin. The result is theoretically ambiguous but most empirical studies find net positive effects on labor supply. In that case, a tax credit like EITC that increases implicit marginal tax rates actually decreases the size of government while increasing labor supply and helping the most needy.

Thus, while marginal tax rates may go up, the size of government, income inequality, and labor market distortions will fall. All effects that Mankiw would applaud, I imagine, despite higher marginal tax rates. While not a lie, marginal tax rates are clearly not the whole story.

hengeOctober 9, 2009 at 7:16 pm

More on most EITC recipients not paying income tax, so it usually will not be the case that EITC phase-out (20%) and income tax (15% in the cited report). The Brookings Institute reported that:
“Most families receive the majority of the EITC for which they qualify in the form of a tax refund. In 2003, 88 percent of EITC dollars claimed were refunded, while the remainder served to offset income taxes owed by these families.” http://www.brookings.edu/~/media/Files/rc/reports/2006/02childrenfamilies_berube/20060209_newsafety.pdf
I’d have to think about how that plays out with other credits, the scheduled expiration of some benefits after 2010 (thanks John), and how things have changed since 2003, but my gut reaction is that the percentage of EITC recipients paying any income tax is less now, and will be less in 2016, than it was in 2003. That is, I suspect fewer than 10% of EITC recipients will pay any income tax, meaning the base number should be 55%, not 70%. Still a big number that calls for some type of reconciliation of claw-backs.

P.S., check the map at page 5 of the Brookings Report, which shows a large swathe across the southeast/southcentral where over 40% of the returns claim EITC. Nothing like it elsewhere in the country.